We have made advances in understanding how proteolytic remodeling of the basement membrane influences submandibular gland (SMG) branching morphogenesis and understanding how fibroblast growth factor 10 (FGF10) binding to heparan sulfate in the extracellular matrix (ECM) influences its diffusion through the ECM and hence its biological activity. While investigating the role of FGF-regulated proteases in SMG basement membrane remodeling, we discovered that decreasing membrane-type matrix metalloproteinase (MT-MMP) activity during SMG branching morphogenesis decreased proliferation and increased collagen IV and MT-MMP expression. Basement membranes (BMs) contain collagen IV and separate cell types within tissues. BMs are dynamic ECM structures, which are constantly synthesized and remodeled during tissue morphogenesis. Although proteolysis was known to be critical for branching morphogenesis, the roles of pericellular MT-MMPs and their proteolytic products were not yet clearly understood. Importantly, specifically reducing epithelial MT2-MMP profoundly decreased proliferation and morphogenesis, increased expression and intracellular accumulation of collagen IV, and decreased the proteolytic release of collagen IV NC1 domains. Importantly, we demonstrated the presence of collagen IV NC1 domains in developing tissue. The addition of recombinant MT2-MMP enzyme rescued branching by increasing the amount of collagen IV NC1 domains released, and restored MT2-MMP and collagen IV expression. We also used purified recombinant collagen IV NC1 domains, which stimulated epithelial proliferation and partly rescued the knockdown of MT2-MMP expression. NC1 domains also increased gene expression of MT-MMPs, and increased collagen and FGFR expression. NC1 domains bind integrins on the cell surface and we showed that they regulate gene expression via beta1 integrin and PI3K-AKT signaling. Alternatively, upregulating MT2-MMP gene expression via EGFR signaling also rescued branching, and collagen IV expression returned to basal levels. HBEGF increased NC1 domain release, proliferation, and MT2-MMP and HBEGF expression. Our studies provide mechanistic insight into how the dynamic balance between proteolysis and proliferation occurs during branching morphogenesis: MT2-MMP-dependent release of bioactive collagen IV NC1 domains, which signal via &#946;1 integrins, coordinate protease production and basement membrane proteolysis with epithelial proliferation. We also made significant advances in understanding how the ECM HS influences FGF diffusion, gradient formation, and biological activity of FGF7 and FGF10. The developmental activities of FGFs are controlled by the gradients that they form in the ECM. We proposed that FGFs exhibit differences in their HS binding affinities which can impact FGF signaling at two distinct levels: 1) they can determine the strength/duration by modulating FGF-FGFR binding/dimerization, 2) they can also dictate the localization of FGF signaling by influencing their diffusion through the ECM. We showed that the differences in diffusion established FGF-specific gradients that contributed to the different morphogenetic activities of FGF7 and FGF10. Reducing HS binding affinity of FGF10 by mutating a single residue in the HS binding pocket of FGF10 converted it into a functional mimic of FGF7 with respect to gradient formation and regulation of branching morphogenesis. In contrast, reducing the affinity of FGF10 for its receptor did not alter its HS-binding properties, but affected the extent of the response. The FGF10 point mutations, which had the strongest impact on the strength and duration of FGF10-FGFR2b interactions, did not support epithelial morphogenesis. These data suggested that differences in the diffusion of the ligands in the ECM and not differences in the interactions of the FGF with its receptor were responsible for the disparate effects of FGF7 and FGF10 on epithelial explants. To assess whether the functional similarities between the FGF mutated proteins induced similar gene expression programs, we performed microarray analysis of isolated epithelial explants that were treated for 44 hrs with FGF7, FGF10, and 2 of the proteins, FGF10-R187V (which behaves similar to FGF7) and FGF10-R193K (which behaves similar to FGF10). The gene expression signatures induced by each of the FGFs correlated with the morphological changes they induce in epithelial explants. The bud morphology and gene expression profile induced by FGF10-R187V mirrored that of FGF7, while FGF10-R193K was similar to FGF10. Our studies provide a framework to explain how HS regulates diffusion and gradient formation of HS-binding morphogens through ECM. Our earlier studies led us to hypothesize that the location of FGF10-induced proliferation at the elongating end buds of FGF10-treated epithelium is determined by an epithelial heparan sulfate proteoglycan (HSPG) with specific patterns of HS sulfation. We cultured FGF10-treated epithelium, cut off the proliferating end buds, and profiled gene expression of all known proteoglycans and HS biosynthetic enzymes. Surprisingly, the transcripts for some of the HS sulfotransferase (HSST) isoforms were more abundant in the proliferating end bud of the epithelium. The sulfated HS present in the end bud may increase FGF10-dependent epithelial proliferation and morphogenesis and the location of sulfotransferase gene expression will define the location of the proliferation. We also profiled expression of all HS biosynthetic genes during in vivo SMG development and used in situ analysis of HSST enzymes to localize their expression in the intact gland. We also used siRNA to decrease HSST gene expression in FGF10-cultured epithelium, which decreased morphogenesis and gene expression of genes associated with FGFR signaling. Thus, specific sulfation patterns of HS increase FGFR2b signaling resulting in end bud proliferation, differentiation, and branching morphogenesis.